Every consumer has a red-money income and a blue-money income and each commodity has a red price and a blue price.You can buy a good by paying for it either with blue money at the blue price or with red money at the red price.Harold has 40 units of red money and 35 units of blue money to spend.The red price of ambrosia is 4 and the blue price of ambrosia is 5.The red price of bubble gum is 1 and the blue price of bubble gum is 1.If ambrosia is on the horizontal axis, and bubble gum on the vertical axis, then Harold's budget set is bounded by
A)two line segments, one running from (0, 75)to (10, 35)and another running from (10, 35)to (17, 0).
B)a vertical line segment and a horizontal line segment, intersecting at (10, 35).
C)two line segments one running from (0, 75)to (7, 40)and the other running from (7, 40)to (17, 0).
D)two line segments, one running from (0, 42)to (10, 35)and the other running from (10, 35)to (50, 0).
E)a vertical line segment and a horizontal line segment, intersecting at (7, 40).

Question

Quizplus · Accepted Answer

Harold can spend his red money (40 units) on ambrosia at a red price of 4 units or on bubble gum at a red price of 1 unit. This gives him a maximum of 10 units of ambrosia (40/4) or 40 units of bubble gum (40/1). Similarly, with blue money (35 units), he can buy ambrosia at a blue price of 5 units or bubble gum at a blue price of 1 unit, giving him a maximum of 7 units of ambrosia (35/5) or 35 units of bubble gum (35/1). The budget set is thus defined by the maximum amounts he can purchase using either red or blue money, leading to the line segments described in option A: from (0, 75) to (10, 35) and from (10, 35) to (17, 0), which account for the trade-offs between spending all on bubble gum, a mix of both, or all on ambrosia.

Every Consumer Has a Red-Money Income and a Blue-Money Income